BALTIMORE, JAN. 27 -- Former Maryland state senator Clarence M. Mitchell III denied today that he asked a business associate to fabricate phony loan documents to cover up $50,000 to $83,000 Mitchell allegedly received from a company controlled by a convicted Baltimore drug dealer.

"Absolutely not," Mitchell, 48, said repeatedly in his obstruction-of-justice trial in U.S. District Court here during questioning by prosecutors.

Mitchell is charged with hampering a grand jury investigation of convicted drug trafficker Melvin (Little Melvin) Williams. The politically influential Mitchell, a Democrat, is accused of giving prosecutors bogus papers suggesting he got a $15,000 loan from Baltimore entrepreneur Jerry L. Hill to hide at least $50,000 Mitchell actually received from the Williams-controlled Scrapp Investment Co.

The $50,000, according to prosecutors, was ostensibly a fee for helping Scrapp obtain city funds to rehabilitate a west Baltimore apartment project in October 1983.

The case is expected to go to the jury Thursday.

For the first time in the two-week-old trial, prosecutors suggested a motive today for Mitchell's alleged cover-up: to avoid paying taxes on the $50,000.

"Isn't it a fact," said prosecutor Max H. Lauten, "that you were in a tight spot . . . because {Mitchell's real estate company} hadn't reported any money from Scrapp?"

"That's not so," said Mitchell, adding that he would have to check his company's records to see exactly how the money was accounted for.

Earlier, Mitchell testified that while he signed a $50,000 agreement with Scrapp to help it get the apartment rehabilitation financing, he received only $5,000, and the apartment project ultimately fell through.

Scrapp President James E. Rogers, 67, testified, however, that Mitchell received a total of $83,000 from the company.

Hill, owner of three Baltimore service stations and the Chicken George fast food restaurant chain, also denied giving Mitchell the $15,000 loan the former senator claimed. Testifying under immunity from prosecution, Hill acknowledged Mitchell asked him to furnish false documentation for the loan, but "there was no $15,000 loan."

Mitchell and his attorneys have said the loan -- given in cash -- was made "on a handshake" without formal documentation. Thus when prosecutors some time later asked Mitchell to explain his financial involvement with Scrapp, Mitchell admittedly asked Hill to prepare a "listing" of loans he had made, including the $15,000 loan, at the time Mitchell was dealing with Scrapp in 1983. This, he said, would help explain deposits in his bank accounts that prosecutors thought were from Scrapp.

Mitchell said his real estate business had "cash flow problems" and owed numerous bills, causing him to borrow money frequently not only from Hill but from other persons including members of his own family.

In other testimony today, four character witnesses spoke in behalf of Mitchell, son of the late Clarence M. Mitchell Jr., noted civil rights leader and longtime congressional lobbyist for the NAACP. The witnesses included Del. Walter E. Fauntroy (D-D.C.) and Maryland state Sen. Decatur W. Trotter (D-Prince George's).